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CME Group Slashes Costs; Sets Eyes on Bitcoin

By Simon Erickson - Feb 2, 2018 at 5:05PM

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After muted results in 2017, the derivatives exchange operator looks to cryptocurrencies as a way to boost volumes.

2017 was an excellent year for investors. The S&P rose 20%, and for the first time in its recorded history closed higher in every single month of the calendar year. However, the surprisingly low volatility was bad for business for CME Group (CME -0.27%), who runs the world's largest derivatives exchange. But even in a year marked by declining revenues, the company honed in on efficiency gains and still beat fourth quarter expectations.

CME Group results: The raw numbers

Metric

Q4 2017

Q4 2016

Year-Over-Year Change

Revenue

$900 million

$913 million

(1.4%)

Operating income

$537 million

$540 million

(0.5%)

Adjusted EPS

$1.12

$1.14

(1.7%)

Data source: CME Group.

What happened with CME Group this quarter?

The fourth quarter's results largely reflected complacent market sentiment, where investors weren't rushing to make a ton of trades. 

  • Average daily volume came in just shy of 16 million contracts during the fourth quarter. This was down 2% from last year.
  • Average overall rate per contract ticked up slightly, rising 1% to $0.736. Equity contracts saw the greatest gains, rising 11% to $0.768 per contract.
  • The company divested several of its less-profitable businesses, such as their European exchange and clearing house and CDS clearing business.
  • Fourth quarter net income included a $2.6 billion tax benefit, which resulted from the Tax Cut and Jobs Act of 2017. Excluding this one-time item, adjusted earnings were $1.12 per share. 

Even after a challenging year, CME Group investors have plenty of good things to look forward to.

  • The company launched Bitcoin futures contracts in December, which allows traders to speculate on the future price of Bitcoin.
  • Global sales campaigns across all products helped non-US average daily volume grow 10% during 2017. This momentum overseas is continuing in 2018.
  • The company is investing in new product development and has increased its fiscal year budget for capital expenditures and R&D expenses, citing tax reform benefits that allowed the moves. 
  • January 2018's trading volumes are already tracking significantly higher than last year. 
A picture depicting Bitcoin

Photo Credit: Getty Images

What management had to say

CEO Group Chairman and CEO Terrence Duffy applauded his company's cost-cutting measures, and mentioned that 2018 is off to a strong start. 

Our primary goals in 2017 were to expand our global customer base, continue to innovate across our diverse product set and focus on operational efficiency. We kept expenses relatively flat for the third straight year, and paid out more than $2 billion in dividends to our shareholders in 2017.  Looking ahead, 2018 is starting out strong, with average daily volume up more than 15 percent to date, driven by broad-based strength across our asset classes.

Looking forward

As an embedded player in the financial services industry, CME Group produces solid cash flows and has shared them with investors through rising dividend payouts. Watch out for any signs of market volatility -- perhaps from the world's growing obsession with cryptocurrencies -- to drive average daily volumes higher in 2018.

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